In the long term, the ratio of working age population to retirees in the western highly developed industrial nations and in China is no longer correct. The exact opposite trend can be observed in India and numerous African countries. However, a look at both the global real and financial economy shows that an aging population inevitably causes higher deficits. At the same time, the Corona pandemic is likely to cause inflation rates to rise faster and earlier than previously expected.
These points were presented by economists and book authors Charles Goodhart and Manoj Pradhan in a SAFE Policy Web Seminar on 7 October 2020. In the discussion with Hans-Helmut Kotz, Senior Policy Fellow at the Leibniz Institute for Financial Research SAFE, the authors outlined the main arguments and central observations of their joint publication "The Great Demographic Reversal", which sheds light on the effects and interrelationships of globalization and demographic change.
Less active workers, more retirees
For both advanced and emerging economies, the two authors' descriptions show that the labor supply strongly increased for decades allowing production to be relocated to low-wage economies. Access to new markets, especially in Eastern Europe – after the end of the Cold War and with the EU's eastward expansion – and in Asia virtually shocked the supply of labor.
"This shock was used as a deflationary push to keep inflation exactly at or below the central banks' targets. Newly industrializing countries have been able to catch up with the industrialized nations in terms of wage inequality where in turn wage inequality between the various skilled workers has increased," explained Goodhart. With the onset of demographic change, however, it is becoming apparent that the labor supply in the West and China will shrink accordingly in the future.
China's working age population has been declining steadily since 2010 reflecting the increasing aging of Chinese society, Pradhan said. In addition, China's phase of rapid capital accumulation in sectors linked to the global supply chains of manufacturing industry is coming to an end. In order to be able to continue to grow and compensate for the shrinking labor supply the country is increasingly focusing on modernization: "China is adapting its economic model and is becoming increasingly technology- as well as consumer-oriented," said Pradhan.
Worldwide opposing trends characterize the global economy
As consequences of the global reversals, the authors noted in the SAFE Policy Web Seminar that the opposing demographic developments in the Western world and Asia on the one hand, and India and Africa on the other result in trade deficits when economies move away from globalized structures. While yield curves are steepening, asset return are becoming increasingly difficult to achieve, and productivity is declining Western and Asian countries are putting pressure on their respective national central banks to keep nominal interest rates as low as possible and to maintain monetary expansion.
The mobilization of the Indian and African labor supply for globalization could mitigate these effects, however, the current political environment does not allow to import labor from these countries. Technological progress and innovation could only be used to a limited extent to halt demographic development.
The Corona pandemic causes such economic uncertainties that, in the opinion of the authors, the previous global economic predictions can hardly be held upright. "The current inflation figures are for the most part meaningless," said Goodhart at the end of the web seminar, "they are based on a consumer basket that does not match the consumer basket people are actually using”. Pradhan also warned: "One of the biggest challenges we are facing is that central banks should help to ensure economic growth while at the same time ensure fiscal expansion and controlling inflation”.